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A Brave New World Dynamic Challenges Facing Kansas Oil & Gas Industry

A Brave New World Dynamic Challenges Facing Kansas Oil & Gas Industry Edward P. Cross, P.G., M.B.A. President Kansas Independent Oil & Gas Association KDHE Bureau of Water

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A Brave New World Dynamic Challenges Facing Kansas Oil & Gas Industry

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  1. A Brave New World Dynamic Challenges Facing Kansas Oil & Gas Industry Edward P. Cross, P.G., M.B.A. President Kansas Independent Oil & Gas Association KDHE Bureau of Water Geology Section Seminar Sedgwick County Extension Education Center Wichita, Kansas September 6, 2012 KIOGA

  2. What Powers the U.S. KIOGA

  3. Are we about to enter the age of fossil fuels? KIOGA • New & evolving technologies • Horizontal drilling • Hydraulic fracturing • Oil & Gas fastest growing manufacturing sector • Crude Oil Imports ~ 45% • Natural gas reserves measure in centuries

  4. Are we about the enter the age of fossil fuels? KIOGA • About 20 new onshore oil fields • Led by independent oil and gas industry • Increase nation’s oil output by 25% within decade • $1 trillion to U.S. economy • 1.3 million new jobs this decade • USGS ~ U.S. has 26% of world’s technically recoverable oil reserves & 30% of natural gas reserves • U.S. largest natural gas producer - 2nd largest coal producer - 3rd largest oil producer in world

  5. Energy Independence KIOGA • Nixon’s “Project Independence” - 1973 • Prospects of achieving energy independence are now very real • Import 45% today • Independents drill 95% of wells in U.S. • An American Oil & Gas Renaissance

  6. Despite Growth in Renewables, World Consumption of Oil and Gas Will Continue to Increase KIOGA Source: EIA, International Energy Outlook, 2012

  7. Brave New World Fact • IEA projects global energy demand increase by 45% from 2010-2035 • Not unconstrained • Assumes significant efficiency improvements • Per Capita Energy Use • Developing world up to only 50% of industrialized world level • Industrialized world conserve down to same level • World energy production increase by 40% to meet demand KIOGA

  8. More Than Fuel:Petroleum is a Part of Your Everyday Life • Materials: asphalt, linoleum, synthetic rubber • Liquids: antifreeze, refrigerants • Plastics: soccer balls, helmets, telephones, rollerblades, milk jugs, computers • Synthetic fabrics: nylon, polyester • Agriculture: fertilizers, pesticides, food preservatives • Medical: heart valves, vitamin capsules, anesthetics, artificial limbs, bandages KIOGA

  9. KIOGA ExxonMobil Global Energy Outlook, 2011

  10. Crude Oil Market Structure • Oligopoly • OPEC Cartel Collude to Influence Market Prices • U.S. Producers are Perfect Competitors • Price-takers not Price-makers • Cost Structure Optimization Determines Profit KIOGA

  11. OPEC Market Dynamics When supply is lowered from S1 to S2, price rises from P1 to P2 KIOGA

  12. The Perfect Competitor Kansas Oil & Gas Producers are Perfect Competitors Price-takers not price-makers. Internal cost structure determines profitability. KIOGA

  13. Effect of Supply Constraints on Perfect Competitor Kansas Oil & Gas Producers Strive to Improve Operating Efficiencies KIOGA

  14. KIOGA

  15. What is Marginal Oil & Gas • Lower edge of profitability • High Cost • Low Yield • 10 barrels of oil per day or less • 60 thousand cubic feet (Mcf) per day or less • When plugged, resource often lost forever • Need policies to enhance American production and reduce dependence on foreign supplies KIOGA

  16. Who are Independents? • Small Businesses • Drill and produce crude oil and natural gas • Not integrated • Sell crude oil and natural gas to purchasers • Price-takers not price-makers • Do not generate and market end-products KIOGA

  17. Who are Independents? • Independents drill 95% of wells in U.S. • Independents produce 67% of America’s oil and natural gas • Independents produce 92% of Kansas’ oil and 63% of Kansas’ natural gas • America’s Oil & Natural Gas Industry KIOGA

  18. First Oil Well = 1860 Miami County First Natural Gas Well = 1873 Montgomery County Current # of Oil Wells = 40,850 Current # of Gas Wells = 18,639 Current # of Injection Wells = 15,428 Current Total # of Wells = 74,654 Current # of Operators = 2,113 Current Oil Production 41.6 Million Barrels Annually 114,000 Barrels per Day Increased 5 of last 6 years Ranked 9th Among 31 Oil Producing States Current Natural Gas Production 313 Billion Cubic Feet Annually 860 million Cubic Feet per Day Ranked 9th Among the 32 Natural Gas Producing States Drilling Permits Issued in 2012 = 4,033 195 MSL Permits Permits Issued in 2011 = 5,441 72 MSL Permits Number of Active Drilling Rigs = 142 Kansas Oil & Gas Industry Statistics KIOGA

  19. Kansas Oil & Gas Fields KIOGA

  20. Kansas Oil & Gas Industry Statistics • $4.8 billion Industry • Supports 67,000 Kansas Jobs and $2.7 billion in family income • Invests over $1 billion in rural Kansas annually • Average Daily Oil Well Production = 2.79 BOPD • 72% of Total Kansas Crude Oil Production from Marginal Wells • 94% of Total Kansas Oil Wells • Average Daily Natural Gas Well Production = 46 Mcf/Day • 74% of Total Kansas Natural Gas Production from Marginal Wells • 81% of Total Kansas Natural Gas Wells KIOGA

  21. KIOGA

  22. Kansas Oil & Gas Industry Taxation KIOGA • Severance Tax up nearly 69% since 2000 • Oil tax collections up 121% over last 2 years • Ad Valorem Tax up 171% since 2000 • Oil tax collections up 40% over last 2 years • Average effective tax rate = 11.61% • Reduce ROI by 26.5%

  23. Conventional Oil & Gas Development

  24. Unconventional Plays • Reservoir - seal - and source rock are all one in the same KIOGA

  25. Mississippian Limestone Play KIOGA • One of newest oil plays in U.S. • Emerging Play • Northern OK and southern KS • $1.2 - $1.5 billion Capex plans • 270-500 BOE per day in first 30 days • $3 - $3.5 million drilling & completion costs • 4,500 feet vertical and 4,500 feet lateral • Could add up to 13% to Kansas production

  26. Energy Policy KIOGA • Trapped by zero-sum game philosophy for energy • World will need 45% more energy by 2035 • U.S. will need 16% more energy by 2035 • We must abandon policies that pit one resource against another • North American energy independent by 2030 with right leadership and policies • Horizontal drilling & hydraulic fracturing essential to realize this energy independence

  27. Perceptions Become Entrenched KIOGA

  28. KIOGA

  29. Hydraulic Fracturing • Kansas • First HF operation in 1947 • Vast majority of wells fraced • National • 60%-80% of wells drilled in next decade • Over 1.2 million fracs since 1947 • Not single verified or documented instance of harm to groundwater • Why is HF Necessary • To stimulateoil and gas production to increase Net Present Value (NPV) of a well through: • Accelerating income through increasing production rates • Reducing well life operating expenses • Increasing total cumulative production KIOGA

  30. Hydraulic Fracturing KIOGA Brief video animation of horizontal drilling & hydraulic fracturing www.kioga.org

  31. KIOGA

  32. Policy Considerations KIOGA • America is home to vast natural resources • More oil, coal, & natural gas than any country in world • Enough energy resources to provide affordable, reliable energy for decades, even centuries to come • America sitting on enough oil and natural gas reserves to replace Persian Gulf imports for the next 50 years! • Policies supporting oil and natural gas would result in more high-paying jobs, more tax revenues, stronger economic growth, and energy security

  33. Key Challenges facing the Kansas Oil & Gas Industry • Obama Administration FY 2013 Budget Proposal • Repeals oil & gas tax provisions that will result in $3.9 billion negative impact on the Kansas economy • Reduces Kansas jobs • Increases dependence on foreign energy supplies • Hydraulic Fracturing • 60-year old technology • Ably and aggressively regulated by States • Mixture 99.5% water and sand KIOGA

  34. Political Environment • Actual Energy Landscape • Take time to understand facts • Obstacles to making energy affordable and reliable • Energy Bills often based on incorrect assumptions • Revolutionary technology just around corner • Energy is scarce and becoming scarcer • Obama Administration Policies damaging nation’s energy security • On a course for less energy – not more • Disparity compelling KIOGA

  35. Political Environment KIOGA • Recent polls • 90% of Americans knew more O&G development = more American jobs • 70% supported increased domestic production • Never bad idea to listen to American people • Cannot stay trapped by zero-sum energy strategy • Must make choices to move in right direction

  36. Thank You www.kioga.org Kansas Independent Oil & Gas Association Edward Cross, President kiogaed@gmail.com 785-232-7772 KIOGA

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